Fed members decided to leave monetary policy essentially unchanged. The Fed Fund Target remains in the 0.00%-0.25% range it has been since the end of 2008, and the Fed will keep on purchasing USD 85 bn a month of securities as part of the third wave of quantitative easing (QE3).
The statement was neither very different than the one released following the previous FOMC meeting, on July 30th-31st, stating that “economic activity expanded at a modest pace during the first half of the year”. However, while labour conditions were previously judged as further improving, the diagnosis was downgraded by a notch, with the addition of just two meaningful words: “on balance”. Admittedly, while non-farm job creations were on a trend of 196,000 (smoothed over three months) when the FOMC last gathered, it is now estimated at only 148,000. This pace is insufficient to absorb new entrants on the labour market and the unemployment rate is declining only because the labour participation rate is falling.
On top of the stalling recovery on the labour market comes the rise in interest rates in response to evocation of tapering in late spring. Over a very short period of time, long-term interest rates tightened by 100 basis points, which is likely to slow down credit growth. Thisdevelopment is noted in the statement, as mortgage rates are said to have “risen further”, while later it is said that “tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market”.
The latest data covering the residential market seem to indicate a slowdown. For instance, new home authorised, which were running at double-digit rate (year-on-year) until the second quarter of 2013, slowed to 11% in August. The development is rather similar for new home starts. As of July, existing home sales remained dynamic, but new home sales were running far less quickly than previously. As for now, consumer spending on durable goods remains resilient, but the slowdown in real disposable income coupled with the rise in interest rates is likely to take a bite on those spending sooner or later. In short, and as we argued in our latest Eco Week piece (see “Hurry up and wait” Eco Week BNP Paribas, September 13th, 2013), the US economy probably needs more stimulus, not less. In a perfect world, such a support could be provided by government spending. But the mood is definitely not into expanding the government. Far fromsupporting the economy, the US Congress does the exact contrary in cutting spending but also on leaving the possibility of a government shutdown or even a plain default. Indeed, fiscal policy is one of the elements “restraining economic growth”, as noted by the Fed in its statement.
by Alexandra ESTIOT
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